Edward P. Lazear 1
The Structure of Wages, Raises and Mobility in Europe
(Based on Introduction to International Differences in Productivity and Personnel Practices,
by Edward P. Lazear and Kathryn L. Shaw)
London LEED ConferenceSeptember, 2005
Edward P. Lazear 2
Employer-employee matched data are now available for many countries
First opportunity to look at the structure of wages within firms
Why differ and how?
Effects of differences
Edward P. Lazear 3
Additional Contributors to the Book and to this Chapter
Denmark: Aagaard, Eriksson, and Westergaard-Nielsen
Sweden:Edin, Holmlund and Skans; Oyer Finland: Uusitalo and Vartainen Norway: Hunnes, Mqen, and Salvanes Germany: Bellman and Alda Italy: Contini, Leombruni, Pacelli, and Villosio France: Kramarz and Perez-Duarte Belgium: Lallemand, Plasman, and Rycx
U.S. to come: Abowd, Haltiwanger, and Lane
Edward P. Lazear 4
Data 9 countries (Belgium, Denmark, Finland,
France, Germany, Italy, Norway, Sweden, United States)
Ideal: All workers in all firms for many years Denmark, Norway, Finland, Sweden (1)
Sub-sets Sweden (2), US, Belgium
Samples from all firms France, Italy
Edward P. Lazear 5
Four Questions Are all firms alike? - Yes Does a rising tide lifts all boats (firm
raise is individual raise) – no Do compressed wage firms lose their
best workers? – no Are countries similar or different? -
Similar
Edward P. Lazear 6
Are All Firms Alike?Examples of wage distributions within and across firms (within country)
Figure 1aWithin firm variation; No between firm variation
PDF for country, PDF for median and extreme firms all identical
0.00E+00
5.00E-01
1.00E+00
1.50E+00
2.00E+00
2.50E+00
3.00E+00
-0.6
-0.5
2-0
.44
-0.3
6-0
.28
-0.2
-0.1
2-0
.04
0.04
0.12 0.
20.
280.
360.
440.
52 0.6
log wages
Figure 1bWithin-firm Similar; Between firms Different
0.00E+005.00E+001.00E+011.50E+012.00E+012.50E+013.00E+013.50E+014.00E+014.50E+01
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
1E-1
50.
10.
20.
30.
40.
50.
6
log wages
Below 10
Near 50
Above 90
All
Edward P. Lazear 7
Decomposition of the Variance of Wages Decompose the variance into the
contribution of firms: σ2 = Σpj σj
2 + Σpj(meanW.j– meanW..)2
where pj is the share of workers located in firm j
Edward P. Lazear 8
Decomposition of the Variance of Wages
Components of overall country wage variance Weighted average of within-firm variance Weighted sum of squared deviations of firm means from country
means
The questions What theories might contribute to the determinants of wage
variance? Which are consistent with the data?
Edward P. Lazear 9
Why Care? If little within-firm wage variation
then Mobility only way to advance
If mobility limited then First job affects lifetime wealth
If much within-firm wage variation, high mobility costs have less impact on worker well-being
Edward P. Lazear 10
Models of wage setting that would produce Figures 1A and 1B
Figure 1A: All firms alike, but within firm wages differ
Figure 1B: All workers paid same within firm; firms differ
Wage setting based on occupation (human capital)
All firms have same distribution of occupations
One occupation per firm; firms differ in occupations
Wage setting for incentives (e.g. tournaments)
Workers ex ante identical; tournament to motivate. Or workers differ in ambition but distribution of types identical in every firm
Inconsistent with tournaments. Consistent with ex post settling up, piece rates where workers sort across firms by ambition
Institutional wage setting Firms all have same job titles on which wages are based or same seniority structure on which wages are based
E.g., Workers divide pie evenly. Pay varies with firm profit (wage change: rising tide lifts all boats)
0; lwj ww ;,;0; lowww
llwwj
Edward P. Lazear 11
Country-specific within and across firm wage distributions (simulating Figures 1A and 1B)
F i g u r e 1 c : N o r w a y 1 9 9 7
0 . 0 0 E + 0 0
2 . 0 0 E - 0 1
4 . 0 0 E - 0 1
6 . 0 0 E - 0 1
8 . 0 0 E - 0 1
1 . 0 0 E + 0 0
1 . 2 0 E + 0 0
1 . 4 0 E + 0 0
1 . 6 0 E + 0 0
1 . 8 0 E + 0 0
2 . 0 0 E + 0 0
l o g w a g e s
B e lo w 1 0
N e a r 5 0
A b o v e 9 0
A l l
Figure 1d:France 1996
0.00E+00
2.00E-01
4.00E-01
6.00E-01
8.00E-01
1.00E+00
1.20E+00
1.40E+00
1.60E+00
1.80E+00
2.00E+00
log wages
Below 10
Near 50
Above 90
All
There is much within firm wage variation.France has more within-firm and country variation than Norway.
Edward P. Lazear 12
Denmark: Much within firm variance but considerable across firm variance
Figure 1eDenmark 2000
0.00E+00
2.00E-01
4.00E-01
6.00E-01
8.00E-01
1.00E+00
1.20E+00
1.40E+00
1.60E+00
1.80E+00
2.00E+00
8
8.2
5
8.5
8.7
5 9
9.2
5
9.5
9.7
5
10
10
.3
10
.5
10
.8 11
11
.3
11
.5
log wages
Below 10
Near 50
Above 90
All
Edward P. Lazear 13
Within-Firm S.D. of Wages is a High Percent of the Country-Level S.D. of Wages
France has relatively tight firm wage distributions Figure 1f Ratio of ave within firm s.d. to country s.d
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Edward P. Lazear 14
Small, but positive, between-firm wage variation in all countriesDenmark’s Firms Have Largest Differences
Std Dev of Firm Means / Country mean WAGE
0
0.05
0.1
0.15
0.2
0.25
Edward P. Lazear 15
Are All Firms Alike?Examples of wage distributions within and across firms (within country)
Figure 1aWithin firm variation; No between firm variation
PDF for country, PDF for median and extreme firms all identical
0.00E+00
5.00E-01
1.00E+00
1.50E+00
2.00E+00
2.50E+00
3.00E+00
-0.6
-0.5
2-0
.44
-0.3
6-0
.28
-0.2
-0.1
2-0
.04
0.04
0.12 0.
20.
280.
360.
440.
52 0.6
log wages
Figure 1bWithin-firm Similar; Between firms Different
0.00E+005.00E+001.00E+011.50E+012.00E+012.50E+013.00E+013.50E+014.00E+014.50E+01
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
1E-1
50.
10.
20.
30.
40.
50.
6
log wages
Below 10
Near 50
Above 90
All
Edward P. Lazear 16
Models of wage setting that would produce Figures 1A and 1B
Figure 1A: All firms alike, but within firm wages differ
Closest to truth
Figure 1B: All workers paid same within firm; firms differ
Definitely not
Wage setting based on occupation (human capital)
All firms have same distribution of occupations
One occupation per firm; firms differ in occupations. Unlikely.
Wage setting for incentives (e.g. tournaments)
Workers ex ante identical; tournament to motivate. Or workers differ in ambition but distribution of types identical in every firm
Inconsistent with tournaments.
Not equal pay for all within firm (incentive pay or sorting possible).
Institutional wage setting Firms all have same job titles on which wages are based or same seniority structure on which wages are based
E.g., Workers divide pie evenly. Pay varies with firm profit Not equal pay for all within firm.
0; lwj ww ;,;0; lowww
llwwj
Edward P. Lazear 17
Implications for MobilityTwo points: If there were no within-firm wage
variation, must change firms to achieve wage increases
If no chance for promotion, luck on first job dramatically affects lifetime income
In principle, people can achieve wage increases and greater lifetime income within firms
Edward P. Lazear 18
Pay Compression: Heterogeneity in Skills or Wage Policy?
Wage Policy: lack of incentives compressed firms lose top workers
Skill homogeneity no pattern in worker exits as a function of wage compression
Results: wage compression and exits are if anything, negatively correlated heterogeneity
Edward P. Lazear 19
Compression and Loss of Top Workers
Difference between Exit Rates of Top Workers Compressed minus Non-compressed
-0.22
-0.17
-0.12
-0.07
-0.02
0.03
Norw ay 1993 Norw ay 1997 Finland 1990 Finland 2000 Denmark 1990 Denmark 2000
Result: Wage compression and exits are if anything, negatively correlated heterogeneity
Edward P. Lazear 20
Wage Increases Figures 1a and 1b relevant models Does a rising tide lift all boats?
Everyone gains in successful firms and everyone loses in failing firms Do firms adopt a lockstep wage increase policy within the firm?
Answer: Much variation in wage growth rates within firms More variance within firms than between Standard deviation of wage growth much larger than average
wage growth within firm.
Edward P. Lazear 21
Large Within-firm standard deviation of wage growth
Within-firm Std Dev of d log wage
0
0.05
0.1
0.15
0.2
0.25
Den
mar
k-19
81
Den
mar
k-19
90
Den
mar
k-20
00
Fin
land
-198
1
Fin
land
-199
0
Fin
land
-200
0
Fra
nce-
1977
Fra
nce-
1979
Fra
nce-
1987
Fra
nce-
1989
Fra
nce-
1993
Fra
nce-
1996
Ger
man
y-19
93
Ger
man
y-19
95
Ger
man
y-20
00
Ital
y-19
90
Ital
y-19
93
Ital
y-19
98
Nor
way
-198
1
Nor
way
-198
6
Nor
way
-199
3
Nor
way
-199
7
Sw
eden
-Hol
-198
6
Sw
eden
-Hol
-199
0
Sw
eden
-Hol
-199
5
Sw
eden
-Hol
-200
0
Sweden is typical. S.D wage growth about 12%
Edward P. Lazear 22
No strong rising tide effect Wages are highly variable within firms
Implications: Wage increases tend to reflect differences in worker ability or
performance, not differences in the performance of firms Wages are tied to the market
• Lazear and Oyer (2004)• Occupation effects far dominate firm effects
Why care?• If lockstep, workers’ fate affected by factors beyond their control • Effort less important• Incentives less important• Firm selection is very important
Edward P. Lazear 23
Are All Firms Alike Wage Growth? More alike than different
France 1996
0.00E+00
1.00E+00
2.00E+00
3.00E+00
4.00E+00
5.00E+00
6.00E+00
7.00E+00
8.00E+00
-1.5
-1.3 -1
-0.7
-0.5
-0.3 0
0.2
0.5
0.7 1
1.2
1.5
change in log wages
Below 10
Near 50
Above 90
All
Norway 1997
0.00E+00
1.00E+00
2.00E+00
3.00E+00
4.00E+00
5.00E+00
6.00E+00
7.00E+00
8.00E+00
-0.3
-0.3
-0.2
-0.2
-0.1
-0.1 0
0.05 0.
1
0.15 0.
2
0.25 0.
3
change in log wages
Below 10
Near 50
Above 90
All
France has very high variation in raises withinand overall compared with Norway (as with levels)Norway is closer to “lockstep” at country and firm level.
Edward P. Lazear 24
More on Mobility Large differences between countries
in mobility rates Entry and exit rates are correlated
across countries High wage firms have lower mobility
rates Entry rates are higher in low wage
firms
Edward P. Lazear 25
Entry and Exit RatesEntry and exit rates
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
exitrate
entryrate
Edward P. Lazear 26
Mobility Patterns
Entry and exit rates are correlated at the country level (equilibrium)
Most countries are growing (entry>exit) Countries differ
Germany (manufacturing) declining
Edward P. Lazear 27
Mobility Lower in High Wage Firms
Correlation of entry and exit rates with wage
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
r-entryrate-wage
r-exitrate-wage
Edward P. Lazear 28
Entry Rates by Wage LevelHigher in Low Wage Firms
Entry rates by wage level
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Den
mar
k-19
81
Den
mar
k-19
90
Den
mar
k-20
00
Fin
land
-198
1
Fin
land
-199
0
Fin
land
-200
0
Ger
man
y-19
93
Ger
man
y-19
95
Ger
man
y-20
00
Ital
y-19
90
Ital
y-19
93
Ital
y-19
98
Nor
way
-198
6
Nor
way
-199
3
Nor
way
-199
7
Sw
eden
-Hol
-198
6
Sw
eden
-Hol
-199
0
Sw
eden
-Hol
-199
5
Sw
eden
-Hol
-200
0
Entry rate high wage firms
Entry rate low wage firms
Edward P. Lazear 29
Why a difference between mobility in high and low wage firms? Possibilities:
High wage workers are more stable Workers do not leave high wage
firms Low wage firms are newer and have
evolving labor needs More turnover Higher entry rates
Edward P. Lazear 30
Conclusions Do all firms have the same wage
structure? No, but all firms have much within-firm wage
variation, mimicking the country distribution This reflects worker heterogeneity more than
policy• Mobility of high wage workers not higher in
compressed wage firms• High variation in raises within firms
firms are microcosms of the economy
Edward P. Lazear 31
Conclusions, continued Raises: Rising tide lift all boats?
No. Standard deviation of within firm raises is 10% to 15%, even though average raises are 0 to 5%
Evidence suggests raises are not determined by firm How do countries differ?
More alike than different – • much within firm wage variation, raise variation, mobility
patterns consistent by firm size But differences.
• France is more variable than Scandinavia • Norway less variable than Denmark
Edward P. Lazear 32
Four Answers Are all firms alike? - Yes Does a rising tide lifts all boats (firm
raise is individual raise) – no Do compressed wage firms lose their
best workers? – no Are countries similar or different? -
Similar
Edward P. Lazear 33
Questions for the Future
To the extent there are country differences, why do countries differ in wage dispersion and raise dispersion (France>Norway) Institutional factors Different industry mix More heterogeneity within country and firms Wage policy
How is productivity affected by wage policy – compression, raises, mobility
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